Jan

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Pandas, Parasites and Stock Market Crashes, from Gregory Rehmke

January 1, 2009 |

7 Comments so far

1. Jay Nelson on January 1, 2009 11:37 pm

   Perhaps the predators and parasites are the ones working at banks that were freed by non-existent regulation to take private sector investment and piss it all away on one last covenant-free debt financing or one more wrong way bet that mortgages would increase forever.

   Who is a predator and parasite? I guess it depends on where you are standing. Of course, all the traders on Wall Street (private sector employees each one of them) created great value when they took big bonuses on the way up for bets which later went sour. But no bonuses were given back or clawed back.

   I guess that must mean that those traders really earned those bonuses.

2. Hudson Cashdan on January 2, 2009 11:38 am

   Are large, bloated corporations with unaccountable boards elected by oblivious shareholders so much different than large, bureaucratic government organizations? Don't those organizations both suffer from either self-interest or lack of interest within their ranks? In both cases, the long-term interest of the stakeholder (taxpayer in the case of government; shareholder in the case of corporation) is of less importance than the self-interest of the organization participant.

3. Gregory Rehmke on January 2, 2009 2:14 pm

   I agree that corporations can be overly bureaucratic. Regulated utilities and military contractors are especially so (the writer for Dlibert worked for a regulated utility, for example). But market institutions work to identify mismanaged firms and replace management (via mergers and take-overs). This is often a messy process with high costs, but competition for management is critical for firms large and small.

   Democratic governments have elections as their form of competition to bring in new management. Unfortunately most Congressmen have secure positions due to massive funding by special interests. Without term-limits we have little effective choice among senators and house members. Plus, 99% of federal government officials are career bureaucrats that are very difficult to either manage or replace (see the great “Yes, Minister” television series for examples, most of which were taken from actual events during a conservative British government).

   Private firms do a much better job managing various services, from prisons to ports, airport, and highways, to schools, security, and garbage services. (Stock markets would be much better regulated without the SEC, by the way. Virginia Postrel suggested that each stock exchange have their own rules and enforcement mechanisms. Dishonest exchanges would be driven out of business.) That doesn’t mean that private firms are everywhere competent or even honest, just that market institutions have advantages since consumers and investors have more freedom of choice.

   The general point of my post though was to argue that the booming US economy over the last 20 years achieved tremendous efficiency and productivity gains, as well as generated vast wealth. At the same time local, state, and federal governments have grown significantly in size, scope, and expense. And regulation has expanded to add vast cost and burden to medical, construction, manufacturing, chemical operations, accounting, tax-preparation, etc. Only a steep market collapse can collapse government revenue and open the possibility for downsizing the state and privatizing or eliminating unnecessary government activity.

   I see these burdens as the parasites that accumulate on species over time. Parasites can serve valuable functions–protecting the body from other parasites, for example (just as a standing army protects a country from other standing armies).

   Maybe trial lawyers could be called the predators since they can bite at firms with various litigation. And with enough litigation they can take down a firm like Dow Corning just as a pack of wolves eventually takes down an elk.

4. Jay Nelson on January 3, 2009 12:01 am

   Respectfully, I think you may be confused between theoretical private sector activity, and its actual practice. When you say “Private firms do a much better job managing various services, from prisons to ports, airport, and highways, to schools, security, and garbage services,” where is there any evidence of this? Or rather, do you imply that we all should accept the statement as a universal truth without questioning it?

   I think if you are open-minded, you must yield to the evidence increasing every single day “that the booming US economy over the last 20 years achieved tremendous efficiency and productivity gains, as well as generated vast wealth”, as you say, but it was from cheap and easy money and cheap and easy credit as much as from hard work and sweat of the brow.

   There are many smart, able and productive government employees and institutions. And many poorly-performing, badly-managed private sector corporations. So taking one as a pure good and one as a pure bad is simply too easy out, and smacks too much of the “private sector is always good” groupthink this country has been subjected to for the past 25 years.

   And look where we all are now as a country, as a direct result of that type of thinking.

   And the lawyers too, that you suggest are parasites, are in many cases the only way that people with no resources have been able to win for themselves compensation for corporate wrongs over the years. Perhaps our private sector ways would suffer less if the lawyers went away, and some of us would be happy with that. But many of these unfortunates would clearly suffer more.

   That kind of burden-sharing, civic-mindedness and sense of fair play is what has been lost in this country. And I hope we get them back soon, before the Kudlows and Laffers abscond with it all.

5. Greg Rehmke on January 3, 2009 11:17 am

   Jay,

   I agree there is much room to debate these claims and issues. It is a big world with lots of badly managed and bureaucratic enterprises, both private, public, and hybrid.

   But for evidence of advantages of private management of the various services (and means of production), I recommend the Reason Foundation’s annual Privatization Report: http://www.reason.org/apr2008/

   I also recommend the extensive empirical data collected by the Index of Economic Freedom and Economic Freedom Reports each year.

   www.freetheworld.com

   Also, I would argue that if “easy money” is made so artificially by monetary authorities, then this distorts investment decisions and disrupts and discoordinates the economy, causing booms then busts.

   And I agree there are many competent and hard working employees and managers working for state and federal government agencies. But government institutions by their nature limit the entrepreneurial scope people have to innovate and improve services. No matter how many hard and capable workers there are at the FDA, SEC, CIA or Dept. of Education, for example, they will be not be able to make these institutions work as well as freely evolving intermediary institutions would free from the coercive power and protection of the state.

   (F.A. Hayek, and L. von Mises wrote extensively about the socialist calculation debate. Public Choice theorists write about incentive problems with government officials and institutions).

   So there is much theory as well as growing empirical support for the comparative advantages of privately-owned asset and institutions.

   The PBS documentary, now on DVD, called The Commanding Heights, does a nice job, and a fairly balanced job, of presenting the “battle of ideas” over government vs. private sector management of the economy. Clips are available here: http://www.pbs.org/wgbh/commandingheights/

   The segments on India are especially good.

6. Jay Nelson on January 3, 2009 3:31 pm

   OK, Greg, no need to debate this with you, it's a long-running debate in our world and will continue for our lifetimes for sure. I am well aware of the literature you cite, but every org you mentioned comes with its own agenda so its research is suspect.

   I just wanted you to admit that the private sector is not the solution to every problem of our society, as your first several postings seemed to imply. I'm glad you've come around a bit with your last posting and admitted that the failure is not one of government overall, but the organization of government, and the role given to agencies that are often conflicting.

   The truth is, and I think we can agree, that the private sector works best when it is closely and competently and consistently regulated over long periods of time — something that we have never experienced in this country. In the 60s and 70s, we had too much regulation in this country. In the 80s through today, we had far too little.

   Wish that our system could now get balanced and work correctly — strong private sector laws and tax policies that support society overall and not just corporate profits. Meanwhile, a wish also for regulation by competent regulators who work for the people's interests and not for those of corporations, and who are not afraid to investigate and to litigate and to legislate until corporations know that profits are for society's benefit, not just their own.

   And a Congress that is open to the needs of Joe Citizen as much as to those of the big contributors. No more trickle-down BS — what has trickled down to the everyman is poverty, no job prospects, no pension, no health care, no ability to afford college for the kids — and 600 channels of TV to keep him pacified so hopefully he won't go into the streets to protest.

7. Hudson Cashdan on January 5, 2009 1:22 pm

   Any logical person will conclude that issue boils down to incentives- those who are better incentivized better manage scarce resources. I believe that private enterprises tend to have managers who operate within superior incentive systems as compared to government workers (possibly with the exclusion of the military). However, due to the reasons I previously cited- unaccountable boards, irresponsible shareholder fiduciaries, etc.- the large, bloated, public corporation is often more similar to the government bureaucracy than the small private enterprise.

   But I agree 100% with the gist of your post…